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A First Step on Fannie and Freddie

WASHINGTON — Despite growing pressure from Congress to act quickly, the Obama administration is moving tentatively to develop a plan to reshape Fannie Mae and Freddie Mac, the mortgage-finance companies taken over by the government 18 months ago.

On April 15, the Treasury Department and the Department of Housing and Urban Development will publish a list of questions seeking comment on the appropriate role of the government in housing finance, as well as the design of mortgage products and protections for consumers who use them.

The government has so far spent $126 billion bailing out Fannie and Freddie. Republican criticism over the absence of a plan for the institutions escalated when the White House released a budget in January that said only that the administration “continues to monitor the situation.”

Appearing before the House Financial Services Committee on Tuesday, the Treasury secretary, Timothy F. Geithner, said the administration would “take a fresh, cold, hard look at the core problems” in housing finance and deliver a “comprehensive set of reforms” to Congress, but declined to specify a timetable.

The lack of specifics frustrated several lawmakers, one of whom, Representative Bill Posey, Republican of Florida, lashed out at Mr. Geithner, saying, “We can’t wait forever to find out.”

Representative Spencer T. Bachus of Alabama, the top Republican on the committee, told Mr. Geithner, “Without reform, the bailouts will not stop, the housing market will not find its footing, and the American economy will not recover.”

Democrats, led by the committee’s chairman, Representative Barney Frank of Massachusetts, said the process could not be rushed. “You can’t really tear down the old jail until you’ve built the new one,” he said.

Mr. Geithner suggested that the administration was waiting for the economy to stabilize before deciding on a plan. Fannie and Freddie back most of the nation’s home loans and are managing the administration’s $75 billion loan-modification program.

Next week, the Federal Reserve plans to complete a $1.25 trillion program to buy mortgage-backed securities, a major test of the recovery’s staying power. If mortgage rates were to quickly rise afterward, the Fed might have to step back in.

“I don’t think there is a credible argument that we can abolish, put out of existence, these institutions today,” Mr. Geithner said.

Mr. Geithner said that Fannie and Freddie did “remarkably well” in sustaining the secondary mortgage market for much of their history until the late 1990s, when they began to take on excessive risks and allow erosion in underwriting standards.

Mr. Geithner vowed in his written remarks that whatever form the overhaul takes, Fannie and Freddie would change.

“Private gains will no longer be subsidized by public losses, capital and underwriting standards will be appropriate, consumer protection will be strengthened and excessive risk-taking will be restrained,” he said.

Asked whether the government should play a continuing role in guaranteeing mortgages, Mr. Geithner told Representative Jeb Hensarling, Republican of Texas, that it was “the central, existential question.”

He added: “There is a quite strong economic case, a quite strong public policy case, for preserving and designing, some form of guarantee by the government to help facilitate a stable housing finance market. But it can’t be the one we have today.”

Models for government support of housing finance in other countries “can provide useful insights and examples to consider,” Mr. Geithner said. Several countries have entities like Fannie and Freddie that guarantee and hold mortgages, though none on the scale of the United States. Elsewhere, governments underwrite mortgage insurance.

Not every wealthy country uses loan securitization to finance housing; some countries in Europe use so-called covered bonds, debt securities that remain on the issuer’s balance sheet.

Mr. Geithner ruled out nationalizing Fannie and Freddie or creating several entities to compete with them. But he said it was worth considering privatizing the two with limited government guarantees for some of their loans.

He also mentioned a public utility model, in which the entities would guarantee mortgages without maintaining investment portfolios, thereby limiting the systemic risk they would pose. Mr. Geithner’s predecessor, Henry M. Paulson Jr., had endorsed that model.

Other witnesses proposed a variety of solutions. Michael D. Berman, chairman of the Mortgage Bankers Association, urged that the government guarantee mortgage-backed securities, but not the regulated entities that would issue them.

Vince Malta, a vice president for the National Association of Realtors, suggested that Fannie and Freddie be converted into government-chartered nonprofit entities that would be required to place any excess revenues into a reserve fund.

And Robert E. Dewitt, testifying for the National Multi Housing Council and the National Apartment Association, which represent the rental housing industry, called for “a balanced housing policy that doesn’t measure success solely by how much home ownership there is.”

A version of this article appears in print on March 24, 2010, on page B3 of the New York edition with the headline: Under Pressure, the White House Ponders How to Remake Fannie and Freddie. Order Reprints|Today's Paper|Subscribe